If you are seeking to build wealth, you will almost always get the advice — "You should really start investing." But why is investing so useful? One of the best ways to ensure that your financial future is secure is to start investing. Investing is an effective way to make your money work for you to generate a higher rate of return. Holding cash and bank savings accounts are safe strategies, but investing your money allows it to grow in value over time leveraging the benefits of compounding and long-term growth. Of course, investing does come with some degree of risk, but it also comes with the opportunity for greater returns. If you have not yet begun your investment journey, here are four reasons you should start today.

Diversify your income and generate passive income: Investing provides an opportunity to diversify your income and earn passive income by buying assets that generate cash flow. Different assets, such as stocks, bonds, and real estate generate cash flow in the form of dividends, interest income, and rental income, respectively. The cash from these assets helps to augment the income you receive from your 9 to 5 or generate cash flow that can be reinvested. Furthermore, by generating income from multiple asset classes, you effectively diversify your regular income and position yourself for greater financial stability.

Power of compounding: Investing allows your money to grow at a faster pace over time. It is called compound growth – something Albert Einstein dubbed "the eighth wonder of the world." Essentially, it means the longer you keep your money invested, and reinvest the income it generates, the more likely it is to grow. Each year, you have the opportunity to achieve growth, not only on the money you have invested but also on the gains you have already made. For example, say you invest $100,000 this year and earn a 10% return on that money, which means you earned $100,000 and, as a result, end up with $110,000. The following year, if you also earn 10%, it will be on the $110,000. Therefore, instead of $100,000, you make $110,000, ending up with $121,000 at the year of the second year. It might not sound like much, but over time, the impact can be huge. If you continue to reinvest your principal and interest over 20 years, you will accumulate just under J$700,000. Whereas if you did not reinvest your interest, you would accumulate just J$200,000. Although money in a savings account also benefits from compounding, the key difference is that investing allows you to generate higher returns, and that allows for compounding to happen at a faster pace. Additionally, some investments allow your returns/gains to grow tax-free until you sell them, which allows your money to compound even faster. However, with a savings account, the interest you generate each month is taxed.

Beat inflation: Inflation erodes the value of your money over time, making it imperative to explore avenues that counter its effects. Individuals can protect their wealth and maintain their standard of living by participating in investment opportunities that historically have a track record of yielding higher returns than the inflation rate. Investments, such as stocks, long-term bonds, real estate, and alternative investments have the potential to offer returns that outpace inflation. Stocks offer good long-term returns that can help you beat the impact of inflation. In fact, today there are some dividend paying stocks that tend to offer yields that are above the current inflation rate of 6.6 per cent as at July 2023. Take for example, Carreras which offers a dividend yield of 9.50 per cent, which more than compensates for current inflation. Additionally, given the high-interest rate environment, bonds are also offering yields that are significantly higher than the current inflation rate. Importantly, most investments, such as stocks and bonds also have higher return potential relative to the interest on a regular saving account, which can range from 0.05 - 2.0%. Of course, investment assets carry more risk than a savings account. However, a well-diversified portfolio can mitigate the risks and generate returns that will help hedge the real value of your money against inflation.

Build long-term wealth: I think this should go without saying, but I am going to say it anyway: Investing is how you build wealth – whether it is in financial assets or real assets, including a business. However, many people have wrong notions about investment, that prevent them from investing. For example, they focus on the short-term volatility in the stock market. Yet, although volatility in stock markets can be unnerving in the short run, investors beginning their journey should look at it from a long-term perspective. The objective of wealth creation is a long-term plan that is not going to happen overnight. Therefore, despite market volatility, investing over a long period has been proven to be advantageous in building long-term wealth. By focusing your energy on the quality of investments that you select, instead of following trends, and remaining invested, even during difficult times, history has shown that funds invested in stocks, including those on the JSE (Jamaica Stock Exchange) have grown significantly more in the long run than those funds saved in a bank account.

Whether you are engaged in retirement planning, saving for your children's education or a down payment on a house or a car, or simply saving for a dream vacation, investing can allow you to reach those goals faster. A solid investment plan can help keep you on track – and increase your chances of achieving your goals and becoming financially secure. Therefore, by placing your money in wealth generating vehicles such as stocks, real estate, and bonds, you not only safeguard your financial standing, but also provide a solid foundation for future growth and financial freedom. By investing, you are deciding to put your money where it will grow and provide additional funds to help you achieve your goals. For a short-term goal, consider investing in certificates of deposits (CDs) or Treasury Bills (T-bills). Medium-term goals are those three to five years away, and you can consider investments that give you access to your funds — without a penalty, such as the NCB Money Market Fund (M Fund). For goals more than seven years away, investments that provide better returns over time would perhaps be best suited to you. These may include stocks, longer-dated bonds, and the NCB Caribbean Equity Fund (E Fund).

If you have not started your investment journey, now is the time to start! Diversifying your income and generating passive income, the power of compounding, beating inflation, and building long-term wealth are four solid reasons to explore the world of investing. Taking the bold step of investing may prove intimidating initially, but the benefits are compelling reasons to start today. With the help of a sound investment strategy, you can achieve your financial goals faster. Embrace putting your money to work for you so that you can achieve your ultimate goal of financial freedom sooner rather than later.

Nadine Thomas, assistant vice-president – Private Wealth, NCB Capital Markets Limited (Photo: Paul Mullings)

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